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FOIA Number: 2018-0275-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
Subgroup/Office of Origin:
Council of Economic Advisers
Series/Staff Member:
Martin Baily
Subseries:
OA/ID Number:
20965
FolderID:
Folder Title:
Weekly Economic Briefing (Seen By President) [2]
Stack:
Row:
Section:
Shelf:
Position:
S
20
7
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CC:MNB
R2L
KS
CS
THE PRESIDENT HAS SEEN
AC
12-30-99
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
copied
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
Baily
Podesta
December 17, 1999
copied p.7
Ben Echaveste Johnson
Podesta
CHART OF THE WEEK
Sperling
Read
Net Farm Income in the 1990s
copied p.8
80
Emergency payments resulting from October 1998 and 1999 legislation
Sperling
Other direct government payments (except transitional payments)
70
Transitional payments
Berger
Direct government payments (pre-1996)
1990-98 average net
Padesta
Net farm income less direct government payments
60
farm income
Billions of 1998 dollars
50
40
30
20
10
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999p
In 1999, net farm income excluding direct government payments (the black part
of the bars) was well below its average level for the 1990s. However, direct
government payments excluding the emergency payments legislated in October
1998 and 1999 would have substantially moderated the effects of the 1998-99
decline in market income. With those emergency payments included, farmers
were substantially shielded from the effects of market forces in 1998-99.
CONTENTS
MACROECONOMIC UPDATE
More Strong Growth in the Fourth Quarter
1
SPECIAL ANALYSIS
Trying to Make Sense of the Bull Market
2
ARTICLE
Inequality in the 1990s: Is the Gini Back in the Bottle?
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
AT THE RISK
OF SOUNDING
LIKE AN OLD
TECHNOPHOBE
VILEY0999
DIST. BY DIST.BY THE WASHINGTON POST WRITERS GROUP
11-2° [email protected]
WWW.WILEYTOONS.COM
MACROECONOMIC UPDATE
More Strong Growth in the Fourth Quarter
The fourth quarter is shaping up as another of strong growth (around 43/4 percent
at an annual rate) with low and stable inflation.
The labor market. Payroll employment grew by an average of 250,000 per
month in October and November, and total hours of production workers have
increased at a 2½ percent annual pace thus far in the fourth quarter. Adding trend
growth in productivity (probably around 2½ percent at an annual rate), these
hours could support GDP growth of about 43/4 percent at an annual rate.
Manufacturing Production
Production. Data on production are
6
also robust. Manufacturing industrial
change from prior quarter, annual rate
production has grown at a 6½ percent
4
annual rate so far in this quarter-
which promises to be the strongest
2
quarterly increase in 2 years (see upper
chart). The acceleration may reflect
0
exports
to
improving
foreign
98:Q1 98:Q2 98:Q3 98:Q4 99:Q1 99:Q2 99:Q3 99:Q4
economies.
Note: 99:Q4 data based on Oct. and Nov. data.
Spending. Spending data remain fragmentary. Solid data are available for
consumer spending-where fourth quarter growth appears to be about 43/4 percent
at an annual rate. Consumer sentiment is fluctuating around the high plateau at
which it has persisted for most of the year. One worry is that some of the fourth-
quarter spending may represent advance hoarding to buffer against potential Y2K
disruptions. If so, the first quarter of next year may be weak.
Inflation. With the exception of energy and tobacco prices, consumer inflation
remains low and stable. Core consumer prices rose just 2.1 percent during the
past 12 months-down slightly from
Measures of Inflation
20
the year-earlier pace. However, some
inflationary risk is on the radar screen:
10
the rise in oil prices may get passed
12-month percent change
Core CPI-U-RS
through to other goods, and a
0
strengthening world economy may lead
to higher import and export prices over
-10
Crude PPI
the next year. Both influences may be
excluding
pushing up prices at the earlier stages
foods and fuels
-20
of processing. For example, the index
Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99
for crude materials excluding foods
and fuels has increased 10 percent over the past year-a dramatic acceleration
from a 16 percent decline during the year-earlier period (see lower chart).
Weekly Economic Briefing
1
December 17, 1999
THE PRESIDENT HAS SEEN
SPECIAL ANALYSIS
12-30-99
Trying to Make Sense of the Bull Market
the exceptional stock market of the last 5 years, investors have earned an
annual real return of over 24 percent-the highest 5-year average real return since
1936. Already, this market ranks as the sixth best of all U.S. bull markets of the
last
00 years, based on the total real return to stocks (see upper chart). Although
some economists remain puzzled by the exuberance of markets, others argue that
changes in the economy help reconcile
Stock Returns in the Top Six Bull Markets
500
443.8
the stock market performance with
Bull
economic theory.
400
Total real stock returns, percent
market
ongoing
300
Stock valuation in theory. Owning a
197.9
209.7
199.1
198.0
196.3
stock provides an investor with the
200
right to a share in the corporation's
100
future profits. Hence, the stock's price
should equal the discounted value of
0
1815
1865
1894
1921
1932
1995
future profits. Future income is
1821
1872
1902
1928
1936
1999
discounted to reflect two factors: the
opportunity cost of waiting (equal to the return on a safe asset such as a Treasury
bond) and the premium that compensates the investor for the greater riskiness of
stock returns relative to bond returns. Strong growth in profits paid as dividends
and falling real bond rates appear to explain part, but not all, of the nearly 200
percent increase in stock prices over the last 5 years.
A declining equity risk premium? Investors demand a higher return on stocks
than on bonds because stocks tend to be riskier than bonds over horizons of a few
years or less. What is surprising to
Stock and Bond Returns
10
economists is how large the equity
Stocks
Bonds
premium has been, particularly in the
8
Average annual real r( turns, percent
last 50 years (see lower chart). The
6
additional volatility of stock returns
over that of bond returns does not
4
appear large enough to justify this 7
2
percentage point premium, unless
0
investors are extraordinarily risk-
1802
1850
1900
1950
1802
averse or their investment horizon is
1849
1899
1949
1999
1999
very short. One possible explanation
for the recent run-up in stock prices, therefore, is that investors have re-evaluated
the risks associated with holding stocks and have bid up stock prices until the rate
of return on stocks has come down enough to reflect a new, lower equity risk
premium.
A new economy? A second possible explanation for the strong performance of
the stock market is that investors may have raised their forecasts of future growth
in profits, based on an improved outlook for productivity growth. According to
Weekly Economic Briefing
2
December 17, 1999
some models, holding other influences on stock prices constant, a one-half
percentage point increase in the expected growth of future profits implies an
increase in stock prices of up to 50 percent. Importantly, what is relevant for
stock prices is not whether long-run growth trends have in fact changed, but only
that investors perceive that they have. In the event that economic developments
do not meet these expectations, investors will bid stock prices back down.
Conclusion. The truly exceptional performance of the stock market over the last
5 years is partly attributable to strong increases in profits and a fall in real bond
rates. Other factors, including a more tolerant attitude toward risk and an increase
in expected productivity growth, may also be boosting stock prices. A remaining
question is whether these and other influences that have helped power the bull
market have nearly played themselves out, in which case the stock market should
cool, or whether we can expect more years of rapid increases in stock prices.
Weekly Economic Briefing
3
December 17, 1999
THE PRESIDENT HAS SEEN
ARTICLE
12-30-99
Inequality in the 1990s: Is the Gini Back in the Bottle?
After increasing since the late 1970s or even earlier, many measures of income
and wage inequality have remained stable since 1993-94. Interestingly, the usual
suspects for the increase in inequality-globalization. technological change, and
de-unionization-appear to have proceeded apace even as the rise in inequality
has been arrested.
Trends. A range of indicators that showed sluggish wage growth and rising
inequality from the early 1970s to the early 1990s appear to have turned around
recently.
Real Wages and Compensation
Real wages and labor's share. Both
110
14.50
average hourly earnings and nonfarm
Compensation
105
(left scale)
14.00
real compensation per hour have
Real compensation per hour
(index, 1992=100)
100
13.50
95
13.00
Average hourly earnings
(constant 1999:Q3 dollars)
increased sharply in the past few years
(see upper chart). The share of income
received by workers in the form of
compensation has shown no long-term
90
12.50
Average hourly earnings
trend relative to capital's share (and
(right scale)
85
12.00
has increased some since 1996).
1979
1983
1987
1991
1995
1999
Income and earnings inequality.
Growth in Usual Weekly Earnings
Various measures of income inequality
1.4
(including the index of income
1982-89
1994-98
1.2
concentration known as the Gini
1.0
Aven' ge annual growth rate (percent)
0.8
coefficient) rose substantially between
06
the mid-1970s and the early 1990s. But
04
0.2
inequality has changed little since then.
0.0
In this expansion, both wages and
-0.2
household income have increased
-0.4
-06
roughly in the same proportion at
10th
25th
Median
75th
90th
percentile
percentile
percentile
percentile
different points in the income
distribution. This contrasts with the
College Wage Premium
1980s expansion, when the gains were
80
concentrated among higher income
households and higher wage workers
70
(see middle chart).
60
Percent
50
The college wage premium. After
shooting up sharply in the 1980s, the
40
wage premium earned by workers with
30
a college degree has stabilized (see
1979
1982
1985
1988
1991
1994
1997
lower chart). The average weekly
earnings of full-time workers with
Weekly Economic Briefing
4
December 17, 1999
THE PRESIDENT HAS SEEN
12-30-99
college degrees, which in 1979 were about 40 percent higher than those of
workers with a high school diploma, have been about 70 percent higher in the
1990s.
The paradox. The apparent trend shift in measures of inequality might not be
surprising if the major forces adduced to explain the rise in inequality in the 1980s
were not still operating in the 1990s. But they appear to be.
Globalization. In the 1980s the increase in trade, particularly with developing
countries, was seen as reducing demand for relatively less-skilled workers.
Yet in the 1990s globalization has increased even more rapidly. For example,
the sum of imports and exports as a share of GDP averaged under 19 percent
in the 1980s and over 22 percent in the 1990s.
Technological change. According to many, an even more important source of
the increased relative demand for skilled workers in the 1980s was
technological change, such as the broader application of computers and new
management approaches emphasizing leaner and more flexible production.
Yet in the 1990s technological change seems to be even more rapid, as
evidenced by the strong investment in computers and information technology,
and the surge in productivity growth.
Institutional and structural changes. In the 1980s, de-unionization and
deregulation weakened the bargaining power of workers and the declining
share of manufacturing in employment reduced high-wage opportunities for
less-skilled blue-collar workers. Yet in the 1990s, union membership has
continued to decline and, after rising through 1997, manufacturing
employment has fallen.
Analysis. There are several plausible reasons why inequality has not been
affected by these forces in the same way recently as it was in the 1980s.
The high pressure economy. Tight labor markets generate increased
employment opportunities for less skilled workers and may also launch a
virtuous circle in which new opportunities lead to new skills and higher
productivity, which in turn may allow for labor markets to operate at higher
levels without upward pressure on prices.
Feedback from globalization and technology to the economy. Ironically, the
forces that were seen as working toward increased inequality may have helped
to achieve a high pressure economy. First, lower import prices help keep
inflation low; imports also reduce pressures on domestic capacity. Second,
A/
positive shocks to productivity from technological change allow firms to pay
higher wages without having to raise prices. And third, it could be that a more
competitive economy is less inflation-prone.
Weekly Economic Briefing
5
December 17, 1999
The trends themselves may have been brought to a halt by offsetting
microeconomic forces. Skill bias is not divinely ordained, and firms may
increasingly find ways to employ relatively less-educated workers more
effectively as their relative wages decline. Second, the pressure on
employment patterns and wages from globalization may diminish as U.S.
firms either exit from low-wage activities or learn how to compete using
competitive strategies that offset cheaper foreign labor costs. Similarly,
declining union membership may mean that those who remain are in areas
with continued bargaining strength.
Conclusion. The halt to rising inequality is surprising in light of the usual
explanations for why inequality increased in the first place. However, there are
some plausible explanations for this development. While the macroeconomic
explanation implies that inequality could reverse in the face of higher
unemployment, the microeconomic considerations suggest that we may have a
more resilient economy and may finally be reaping the benefits of having adjusted
to some major structural challenges. Claims that globalization and rapid
technological change inevitably increase inequality need to be re-appraised.
Weekly Economic Briefing
6
December 17, 1999
THE PRESIDENT HAS SEEN
12-30-99
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
The Impact of Changes in Financial Services Industries on Cities. Financial
services firms have been an important source of jobs, income, and tax revenue in
cities, especially in central business districts. A recent study observes that, as of
1996, 8.5 percent of employment and 14.5 percent of earnings in 88 of the largest
central cities were in financial services. Some cities, such as Hartford,
Wilmington, and Jersey City, are highly specialized in financial services, with
approximately 20 to 30 percent of city employment in this sector. In many larger
cities-including New York City, Chicago, Boston, and San Francisco-over 10
percent of the jobs and 20 to 30 percent of the residents' earnings are found in
financial services. The study finds that, especially in banking, heavy investments
in information technology such as the automated teller machine, telephone calling
centers, on-line banking and the in-store supermarket branch have led to decreases
in employment, especially for lower-skilled workers. Mergers and acquisitions
have concentrated banking assets in a number of core banking metropolitan areas,
with Charlotte and New York currently in dominant positions. Geographic
concentration is less noticeable in other sectors. For example, mutual fund assets
have actually become less concentrated, with New York's share falling from 40 to
copied
24 percent between 1986 and 1996.
Ben Johnson
Racial Digital Divide Extends Beyond Income Differences. The latest digital
Echaveste
divide data from the Commerce Department show that in 1998 African American
and Hispanic households were approximately half as likely to have computers at
Podesta
home and roughly two-fifths as likely to have Internet access than white
households. While computer ownership and Internet access for all groups have
soared, the racial/ethnic divide has also grown. Because computer and Internet
use are correlated with income and education, some of the divide reflects lower
average household income and lower average educational attainment among
African Americans and Hispanics. However, a recent RAND analysis of the 1997
survey data finds that a digital divide persists even after controlling for education,
income, location of residence, sex, and age. In other- words, racial and ethnic
characteristics appear to exert an independent and important influence on home
computer access and network use.
Assessing the Costs of Student Loans. A recent report from the Department of
Education demonstrates how budget rules mandated by the Credit Reporting Act
of 1990 tend to obscure program costs for student loans. Under such rules,
estimates of subsidy costs for student loans are calculated on a present value basis
while estimates of Federal administrative costs reflect actual spending in a given
year. When both subsidy and administrative costs are calculated on a net present
value basis, the report concludes that providing a student with a $10,000
subsidized loan costs $1,407 whereas the government makes $411 when the same
loan is provided directly to the student. This difference reflects the interest
received on repayments of the direct loans, which more than offsets the higher
administrative expenses of direct loans.
copied
Sperling
Reed
Weekly Economic Briefing
7
December 17, 1999
Podesta
THE PRESIDENT HAS SEEN
INTERNATIONAL ROUNDUP
12-30-99
Japan's Tenuous Recovery. Although output grew at an annual rate of around 5
percent in the first half of the year, recent data suggest that Japan's economic
recovery has not yet fully taken hold. Last week, preliminary data showed that
real GDP fell at a 3.8 percent annual rate in the third quarter. This week, the
Bank of Japan's quarterly Tankan survey showed that while business sentiment
improved somewhat, companies still had excess inventories and planned to
further reduce investment in plant and equipment. Large enterprises, for example,
planned to cut capital spending by 11 percent in the 1999 fiscal year; furthermore,
many of these enterprises reported that they had too many workers, which bodes
poorly for a revival in consumer confidence. Japan's Economic Planning Agency
also cautions that high unemployment, weak private demand, and a sustained
decline in business fixed investment remain obstacles to full economic recovery,
despite recent improvement in exports, industrial production, and company
profits.
Trade Unions to Unite. On January 1, 2000, a new international organization of
trade unions will be launched, incorporating 16 million members in 800 unions
from 140 countries. The organization, called Union Network International (UNI),
copied
will be the world's largest grouping of individual trade unions, and will cover a
range of non-manufacturing sectors, including commerce, electricity, finance,
Sperling
media, entertainment, postal, private health care, telecommunications, and
Berger
tourism. The organization is pressing for an overhaul of the WTO and for trade
Podesta
agreements to incorporate international core labor standards, including the right to
organize into unions. UNI intends to use the latest communications technology to
build networks with affiliates and to give union members a more effective voice
with governments, multinational corporations, and international institutions.
Food Gap to Increase in Low-Income Countries. For 67 low-income
developing countries, the food gap-defined as the shortfall between a) domestic
food production plus commercial imports and b) the level required to meet
minimum nutritional requirements-is estimated to be 15 million tons in 1999,
according to a new USDA report. Global food aid shipments for 1998/99 are
estimated at roughly 9.5 million tons, almost two-thirds of the shortfall. However,
the distribution of this aid is not necessarily based on nutritional need; for
example, only 23 percent of food aid goes to Sub-Saharan Africa, covering just 20
your Thrus keep Kg your Saudy letter we in Em are way
percent of the-region's food shortfall. Distribution is likely to become more
important over the next decade. The food gap for the 67 countries is expected to
increase 54 percent to 23 million tons, with Sub-Saharan Africa accounting for 70
percent of the gap in 2009. The total number of people whose food consumption
fails to meet nutritional requirements is projected to grow 13 percent to nearly 1
BC Mill
billion; however, the growth in Sub-Saharan Africa will be 40 percent, so that 60
percent of the region's population will be food deficient in 2009.
Gene/Sandy
Should we ask for more $
in budget for this better
Weekly Economic Briefing
8
way to help farmers -to
Keepprices up
BC
RELEASES THIS WEEK
Housing Starts
**Embargoed until 8:30 a.m., Friday, December 17, 1999**
Housing starts decreased 2 percent in November to 1.600 million
units at an annual rate.
U.S. International Trade in Goods and Services
The goods and services trade deficit rose to $25.9 billion in
October from $24.2 billion in September.
Industrial Production and Capacity Utilization
The Federal Reserve's index of industrial production increased
0.3 percent in November. Capacity utilization was unchanged at
81.0 percent.
Retail Sales
Advance estimates show that retail sales rose 0.9 percent in
November following an increase of 0.3 percent in October.
Excluding sales in the automotive group, retail sales rose 0.4
percent following an increase of 0.8 percent.
Consumer Price Index
The consumer price index increased 0.1 percent in November.
Excluding food and energy, consumer prices rose 0.2 percent.
MAJOR RELEASES NEXT WEEK
Gross Domestic Product (Wednesday)
Advance Durable Shipments and Orders (Thursday)
Weekly Economic Briefing
9
December 17, 1999
U.S. ECONOMIC STATISTICS
1970-
1993
1998
1999:1
1999:2
1999:3
Percent growth (annual rate)
Real GDP (chain-type)
3.0
4.6
3.7
1.9
5.5
GDP chain-type price index
5.2
1.1
2.0
1.3
1.1
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.7
3.1
2.7
0.6
4.9
Real compensation per hour:
Using CPI
1.0
3.9
2.8
1.2
2.1
Using NFB deflator
1.5
4.7
2.9
2.9
4.4
Shares of Nominal GDP (percent)
Business fixed investment
11.4
12.5
12.6
12.6
12.8
Residential investment
4.5
4.2
4.4
4.5
4.4
Exports
8.2
11.0
10.7
10.7
10.9
Imports
9.2
12.7
12.9
13.4
13.8
Personal saving
6.6
2.6
2.2
1.8
1.5
Federal surplus
-2.8
0.5
1.1
1.3
1.4
1970-
September
October
November
1993
1998
1999
1999
1999
Unemployment Rate (percent)
6.7**
4.5**
4.2
4.1
4.1
Payroll employment (thousands)
increase per month
103
263
234
increase since Jan. 1993
20043
Inflation (percent per period)
CPI
5.8
1.6
0.4
0.2
0.1
PPI-Finished goods
5.0
0.0
1.1
-0.1
0.2
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Weekly Economic Briefing
10
December 17, 1999
FINANCIAL STATISTICS
October
November
Dec. 16,
1997
1998
1999
1999
1999
Dow-Jones Industrial Average
7441
8626
10397
10810
11245
Interest Rates (percent per annum)
3-month T-bill
5.06
4.78
4.86
5.07
5.23
10-year T-bond
6.35
5.26
6.11
6.03
6.31
Mortgage rate, 30-year fixed
7.60
6.94
7.85
7.74
7.86
Prime rate
8.44
8.35
8.25
8.37
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
December 16, 1999
Week ago
Year ago
Euro (in U.S. dollars)
1.017
0.1
N.A.
Yen (per U.S. dollar)
103.0
0.5
-10.9
Major currencies index (Mar. 1973=100)
93.26
0.2
1.1
(trade-weighted value of the U.S. $)
Real GDP
Unemployment
CPI inflation
International Comparisons V
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
4.2 (Q3)
4.1 (Nov)
2.6 (Nov)
Canada
4.2 (Q3)
7.2 (Oct)
2.3 (Oct)
Japan
1.0 (Q3)
4.7 (Oct)
-0.7 (Oct)
France
3.0 (Q3)
11.0 (Sep)
0.8 (Oct)
Germany
1.2 (Q3)
9.0 (Oct)2/
0.8 (Oct)
Italy
0.8 (Q2)
12.1 (Apr)
1.8 (Oct)
United Kingdom
1.8 (Q3)
5.9 (Aug)
1.2 (Oct)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for unified Germany.
Weekly Economic Briefing
11
December 17, 1999
Baily
THE PRESIDENT HAS SEEN
COiMNB
12-14-99
RL
KS
CS
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
December 10, 1999
CHART OF THE WEEK
Convergence of Exchange Rates in 1999
140
1.4
Yen/$
130
(left scale)
1.3
120
1.2
110
1.1
100
1
90
0.9
Euro/$
80
(right scale)
0.8
70
0.7
Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec
The euro is nearly at parity with the dollar while the yen is nearly at parity with the penny.
CONTENTS
CURRENT DEVELOPMENT
Have Oil Prices Reached their Peak?
1
ARTICLES
A Closer Look at Skill-Biased Technical Change
3
Saving the Planet while Cutting Taxes
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
NO CUSTOMERS.
NO PROFITS.
GUESS THERE'S
ONLY ONE THING
PUBLIC!
TO DO
LEMONADE
LEMONADE.COM
CURRENT DEVELOPMENT
Have Oil Prices Reached their Peak?
At the end of last year, real oil prices hit their lowest point in over 25 years. Since
then, rising demand and falling supply have pushed crude oil prices back up. As
of yesterday, the price stood at $26 per barrel for West Texas Intermediate crude
oil. Prices of refined products, like gasoline, have followed the same general
trend. A key issue for the United States economy in the next year is whether oil
prices have peaked or whether further increases are expected.
Supply. One of the reasons for the increase in oil prices is a reduction in supply.
After oil prices fell below $12 a barrel at the end of last year, the major OPEC
countries agreed to production targets to limit the supply of oil and thereby
increase the price. Analysts generally believe that the major OPEC countries
have stuck to the agreed upon limits. In addition, Iraq cut off oil exports in
November, reportedly to protest a shortening of the renewal period of the "Oil-
for-Food" program from 6 months to 2 weeks.
Demand. Shifts in demand have also influenced oil prices. The Asian crisis and
slow world growth dampened demand for oil last year. Since then, economic
recoveries in Asia and in parts of Europe have combined with the booming U.S.
economy to push up world oil demand this year. In addition, there is some
anecdotal evidence of stock building of oil and refined products in preparation for
possible Y2K-related disruptions. Demand is expected to remain strong next
year.
Outlook. Futures prices for oil imply that markets expect oil prices will fall next
year. Two factors support this view. First, most Administration experts agree
that the New Year will not generate widespread disruptions in the flow of oil.
Moreover, Mexico, Venezuela, and
Real Spot Oil Prices
80
Saudi Arabia recently announced that
70
60
they would make up any Y2K-related
$/Bbl (1996 dollars)
50
shortfalls. Second, there are reasons to
40
suspect that OPEC desires lower prices
30
than those seen today. High oil prices
20
10
encourage non-OPEC high-cost
0
suppliers to increase production,
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
cutting into OPEC's profits. In
Notes: Price IS West Texas Intermediate
The gray bars represent U.S. recessions.
addition, high prices threaten the
October-December 1999 data are estimates
integrity of the cartel by making
production in excess of agreed upon targets more profitable.
Interestingly, none of the Blue Chip forecasters expect that rising oil prices will
seriously threaten the current economic expansion, despite the experiences of the
1970s and early 1990s when oil price hikes were associated with economic
downturns (see chart). This view seems justified because, relative to overall
Weekly Economic Briefing
1
December 10, 1999
prices, the price of oil is much lower today than the peaks reached in the 1970s
and the early 1990s. Unlike past oil price increases, this one was preceded by a
decline in oil prices. Moreover, the energy intensity of the economy has fallen
steadily for the last 50 years, suggesting that the U.S. economy may be less
vulnerable to oil price shocks. Arguably, only a precipitous spike in oil prices
would pose a significant risk to the economy.
Weekly Economic Briefing
2
December 10, 1999
ARTICLE
A Closer Look at Skill-Biased Technical Change
One common explanation for the increase in wage inequality in the United States
from 1979 to the early 1990s is technical progress that has shifted labor demand
toward more highly skilled workers relative to the less skilled-so called "skill-
biased technical change." Research is beginning to provide insights into how
information technology (IT) affects the workplace and the demand for skills.
Findings. Case studies of individual firms have shown how companies use IT to
change the way they conduct business. These studies find that successful IT
investment is often coupled with changes in business strategy and organizational
structure. A recent study provides broad supporting evidence based on survey
data on about 400 large U.S. firms during the mid-1980s to the mid-1990s. The
two key findings are:
IT interacts with organizational structure and worker skills. Controlling for
industry and firm size, firms that invest more in computer equipment also tend
to have a decentralized workplace organization (including broader job
responsibilities for line workers, more decentralized decisionmaking, or more
self-managing teams) and employ higher-skilled or more educated workers.
One reason for combining IT and a decentralized workplace may be that IT
can put greater information in the hands of front-line workers who may be
better able to make day-to-day decisions than upper-level managers. This
increased role for front-line workers in turn may raise the importance of skills
and education for job performance.
These interactions affect productivity. Firms with high levels of IT
investment, workplace decentralization, and more highly skilled workers tend
to have higher productivity than those with lower levels. Moreover, firms that
use IT intensively without instituting organizational changes often experience
little if any productivity gains. This helps explain the apparent lag (during the
1980s and early 1990s) in the effect of IT on productivity in the United States,
since it has taken time for firms to redesign their organizations to take
advantage of their IT investments.
Other evidence. Trends in the economy over the last 25 years dovetail with the
case-study and firm-level evidence. Impressive advances in the underlying
science and engineering of IT have increased the capabilities and reduced the
costs of this technology. As a result, real investments in IT have grown at double-
digit rates for several decades. Meanwhile, decentralized workplaces appear to
have become more common. The skill levels of the work force have also been
rising, at least according to measures such as the proportion of college graduates
in the work force. Until 1994, the demand for more educated workers outpaced
supply, raising the wages of more-skilled workers relative to less-skilled workers
(see chart). Earnings growth since 1994 has been much more evenly distributed.
Weekly Economic Briefing
3
December 10, 1999
Implications and conclusion. Based on evidence from large firms, IT and IT-
enabled organizational change appear to be important factors in raising the
demand for skilled workers. Of course, IT can reduce the demand for skills in
some cases. For example, computer-assisted scanning devices for final sales or
Ratio of Full-Time Year-Round Weekly Median
inventory control may require lower
Earnings by Educational Attainment
average skills by retail clerks, and an
2.6
automated teller machine may
2.4
College graduate:
completely replace a bank teller.
2.2
high school drop-out
2.0
Nonetheless, it seems apparent that
Ratio
1.8
new technology and organizational
1.6
change are making the acquisition of
College graduate:
1.4
high school graduate
education and skills increasingly
1.2
important for getting and keeping
1.0
well-paying jobs. This highlights the
1979
1982
1985
1988
1991
1994
1997
importance of ensuring that students
learn the basic skills needed in the information economy: higher-level math,
reading, and writing skills, personal skills such as the ability to work effectively
in groups, and a knowledge of computers.
Weekly Economic Briefing
4
December 10, 1999
ARTICLE
Saving the Planet while Cutting Taxes
The Administration has proposed a domestic greenhouse gas tradable permit
program for 2008 to 2012 subject to the ratification of the Kyoto Protocol. Recent
analysis indicates that how the program is implemented will affect energy
company shareholders and taxpayers, and could also affect the costs to society of
achieving the Kyoto target.
Effects of the tradable permit program on energy prices. Implementing a
tradable permit program would require industries covered by the program to
restrict their greenhouse gas emissions to comply with the Kyoto Protocol
emissions target. Abating greenhouse gas emissions involves costs associated
with investing in new technologies, fuel-switching, and other ways to reduce
emissions. As the energy sector becomes more competitive over the next decade,
the costs of controlling emissions will be reflected in consumer prices. For
example, the Administration's economic analysis of the Kyoto Protocol found
that a tradable permit price of $23 per ton of carbon would increase energy prices
to consumers by about 5 percent in 2010, but this increase could be largely offset
through the implementation of the Administration's electricity restructuring
proposal.
To "grandfather" or to auction? A key question in implementing a tradable
permit system is the allocation of permits. For example, the government could
give away permits to firms ("grandfathering"); alternatively, the government
could sell permits to firms through auctions. Importantly, the price of energy paid
by consumers is likely to be the same in either case. Permits will be scarce, and
the price of energy will reflect the cost of buying a permit or taking abatement
measures regardless of how the permits were originally distributed. Producers
who receive free permits will be like owners of particularly low-cost oil wells
when oil prices go up: they will sell at the market price and reap windfall profits.
In contrast, an auction allows the government to capture the value of the permits,
because competition should lead companies to bid away almost the full value of
any potential windfall profits from owning the permits.
Grandfathering would result in the giving away of permits valued in the tens to
hundreds of billions of dollars annually. Because these firms can pass on most of
the cost of reducing emissions to consumers, the grandfathering of permits would
provide these firms with significant windfall profits, and allow them to enjoy
higher profits under climate policy than without climate policy. However, if the
government sells permits it would receive revenues in the tens to hundreds of
billions of dollars annually. While energy firms would have lower profits under
an auction, the permit revenues could be recycled back into the economy through
tax cuts. Recent research has found that such revenue recycling could reduce the
costs to society resulting from the use of greenhouse gas permits by up to 80
percent.
Weekly Economic Briefing
5
December 10, 1999
THE PRESIDENT HAS SEEN
12-14-99
Effects of permit allocation on energy industries. One paper evaluated the
effects of grandfathering and auctioning on energy industries. Giving away
permits to energy industries would significantly increase equity values while
selling permits would lower equity values. An alternative is to follow a hybrid
approach that combines elements of grandfathering and auctions. It is estimated
that grandfathering 5 to 15 percent of the permits to energy firms while auctioning
the remaining permits would be sufficient to ensure that these firms' equity values
would be the same under climate policy as they would be without climate policy.
Furthermore, since most of the permits would be auctioned, such an approach
would still provide significant revenues to the government.
Conclusion. The type of permit allocation does not affect energy prices. It can
however, significantly influence the impact of climate policies on energy
industries as well as the costs to society. A hybrid system of grandfathering and
auctioning permits could preserve energy industries' profits and equity values
while providing sufficient government revenues to finance tax cuts or for other
purposes.
Weekly Economic Briefing
6
December 10, 1999
THE PRESIDENT HAS SEEN
12-14-99
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Midwest Feels the Heat of a Strong Economy. After suffering from a weak
labor market during the 1970s to early 1990s, labor market conditions in the
Midwest have improved significantly. In fact, the Midwest's unemployment rate
(3.4 percent in October of this year) has been the lowest among the four regions
for every month since April 1991. As a result, business executives in the Midwest
report that their most difficult problem is "finding good help at current wage
offers." A recent study by the Federal Reserve Bank of Chicago suggests that the
region's tight labor market will continue. One reason the study cites is slow work
force growth caused by continued net-migration out of the Midwest. Another
reason is the region's strong economy, which has propelled growth in labor
demand, particularly for workers with high levels of education and skills. The
study mentions possible public policy responses including encouraging migration
to the region, improving education and training, continued welfare-to-work
efforts, improving access to transportation and information about jobs for inner-
city residents, and encouraging businesses to move to the central cities, where
labor markets are typically not as tight.
The Gains from Telecommuting. In May 1997, more than 21 million
Americans did some work at home as part of their primary job, according to a
recent report. Lower prices and expanding access to mobile phones, laptops, e-
mail, and the Internet have made it easier for people to work at home. The report
finds that telecommuting provides benefits both to employees and businesses.
Workplace flexibility reduces time spent commuting and may help workers
balance work and family responsibilities. Not surprisingly, working parents take
advantage of telecommuting more than childless workers; in fact, married women
with children under the age of 6 had the highest home work rate at nearly 24
percent. Evidently, employers find that offering the option of telecommuting is a
way to attract and retain employees and reduce absenteeism. In a 1998 study of
large companies, 33 percent allowed employees to work off-site on a regular basis
and another 14 percent said they were considering it.
Beige Book Reports Continued Growth. Reports from most Federal Reserve
Districts indicated continued moderate to strong economic growth in October and
November. Consumer spending picked up over the Thanksgiving weekend, after
being hampered by warm weather earlier in November. Manufacturing activity
continued to advance in most Districts. Commercial real estate markets remained
strong in most parts of the country. Home sales have slipped. Agricultural
conditions were mixed, and low prices persist for grains and some other
commodities. Oil and gas drilling has increased. Bank lending has declined for
residential mortgages but risen for consumer loans. Labor markets remain tight in
all Districts. The pace of wage and salary increases did not appear to be
accelerating generally, although there were some reports of larger recent salary
increases in some industries and regions. Prices appear to be mostly steady at the
retail level. Although prices of industrial goods were reported to be mostly steady
in a majority of Districts, prices of some goods have been on the rise.
Weekly Economic Briefing
7
December 10, 1999
THE PRESIDENT HAS SEEN
12-14-99
INTERNATIONAL ROUNDUP
€1 = $1 = ¥100? Last week, the yen soared to its strongest level against the dollar
in 4 years despite interventions by the Japanese government, while the euro
tumbled to its weakest level since its introduction at the beginning of the year,
briefly dropping below parity with the dollar. Economic statistics released this
week may help curb these trends in the yen and the euro. After growing soundly
in the first half of the year, the Japanese economy contracted at an annual rate of
nearly 4 percent in the third quarter, according to data released on Monday.
Indicators suggest that the outlook for the fourth quarter is similarly dismal,
which should dampen upward pressure on the yen. Turning to the euro,
unemployment and other indicators released this week indicated improved
economic prospects in Germany, suggesting a brighter outlook for the Euro-
region. The euro has climbed back above parity and is currently at around $1.02.
New Alliance to Produce Global Framework for E-business. The United
Nations and the world's leading computer and software companies have joined
together to unify technical standards for the exchange of electronic business
information, a move that may revolutionize business on the Web. Currently, most
Web documents are stored and transmitted in a computer language known as
HTML (Hypertext Markup Language). HTML is easy to learn and is adequate for
simple data display, but it limits the types of information that can be represented.
A new, more sophisticated language known as XML (Extensible Markup
Language) holds the promise of broadening how the Internet can be used. For
example, standardized XML specifications would allow an emergency room
physician to transfer a wider variety of patient records from distant hospitals into
a local database. The public-private alliance aims to create a single global XML
standard so that firms in different industries can exchange electronic business
data, thereby lowering the barrier of entry to electronic business, particularly with
respect to small and medium-size enterprises and developing countries.
Better Ways to Cut Pollution. Developing countries are cutting industrial
pollution by combining the power of local communities, markets, and the media
to police discharges from private companies, according to a recent World Bank
report. The report argues that controlling pollution through traditional regulations
entails high enforcement costs and often yields disappointing results. The report
presents evidence suggesting that market incentives and public information may
provide much better outcomes. Seven highly populated regions in Colombia, for
example, instituted a system that charges a flat levy for every ton of specified
pollutants discharged into the nation's waterways. In the first 6 months of the
plan, discharges of biochemical oxygen demand (BOD) into the Rio Negro River
fell 52 percent, and discharges of total suspended solids fell 16 percent. The
copied
Indonesian PROPER program, in which regulators publish ratings of plants based
on their environmental performance, provides an example of the power of public
Frampton
information disclosure. In an 18-month period, PROPER induced the pilot group
Carol Browner
of factories to reduce their water pollution by 40 percent.
Podesta
Weekly Economic Briefing
8
December 10, 1999
RELEASES THIS WEEK
Producer Price Index
**Embargoed until 8:30 a.m., Friday, December 10, 1999**
The producer price index for finished goods rose 0.2 percent in
November. Excluding food and energy, producer prices were
unchanged.
Productivity
Nonfarm business productivity rose 4.9 percent at an annual rate in
the third quarter. Manufacturing productivity rose 3.9 percent.
MAJOR RELEASES NEXT WEEK
Consumer Prices (Tuesday)
Retail Sales (Tuesday)
Industrial Production and Capacity Utilization (Wednesday)
U.S. International Trade in Goods and Services (Thursday)
Housing Starts (Friday)
Weekly Economic Briefing
9
December 10, 1999
U.S. ECONOMIC STATISTICS
1970-
1993
1998
1999:1
1999:2
1999:3
Percent growth (annual rate)
Real GDP (chain-type)
3.0
4.6
3.7
1.9
5.5
GDP chain-type price index
5.2
1.1
2.0
1.3
1.1
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.7
3.1
2.7
0.6
4.9
Real compensation per hour:
Using CPI
1.0
3.9
2.8
1.2
2.1
Using NFB deflator
1.5
4.7
2.9
2.9
4.4
Shares of Nominal GDP (percent)
Business fixed investment
11.4
12.5
12.6
12.6
12.8
Residential investment
4.5
4.2
4.4
4.5
4.4
Exports
8.2
11.0
10.7
10.7
10.9
Imports
9.2
12.7
12.9
13.4
13.8
Personal saving
6.6
2.6
2.2
1.8
1.5
Federal surplus
-2.8
0.5
1.1
1.3
1.4
1970-
September
October
November
1993
1998
1999
1999
1999
Unemployment Rate (percent)
6.7**
4.5**
4.2
4.1
4.1
Payroll employment (thousands)
increase per month
103
263
234
increase since Jan. 1993
20043
Inflation (percent per period)
CPI
5.8
1.6
0.4
0.2
N.A.
PPI-Finished goods
5.0
0.0
1.1
-0.1
0.2
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
PPI data embargoed until 8:30 a.m., Friday, December 10, 1999.
Weekly Economic Briefing
10
December 10, 1999
FINANCIAL STATISTICS
October
November
Dec. 9,
1997
1998
1999
1999
1999
Dow-Jones Industrial Average
7441
8626
10397
10810
11135
Interest Rates (percent per annum)
3-month T-bill
5.06
4.78
4.86
5.07
5.10
10-year T-bond
6.35
5.26
6.11
6.03
6.14
Mortgage rate, 30-year fixed
7.60
6.94
7.85
7.74
7.84
Prime rate
8.44
8.35
8.25
8.37
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
December 9, 1999
Week ago
Year ago
Euro (in U.S. dollars)
1.016
1.4
N.A.
Yen (per U.S. dollar)
102.6
-0.1
-13.1
Major currencies index (Mar. 1973=100)
93.05
-0.8
0.1
(trade-weighted value of the U.S. $)
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
4.2 (Q3)
4.1 (Nov)
2.6 (Oct)
Canada
4.2 (Q3)
7.2 (Oct)
2.3 (Oct)
Japan
1.0 (Q3)
4.7 (Oct)
-0.7 (Oct)
France
3.0 (Q3)
11.0 (Sep)
0.8 (Oct)
Germany
1.2 (Q3)
9.0 (Oct)2/
0.8 (Oct)
Italy
0.8 (Q2)
12.1 (Apr)
1.8 (Oct)
United Kingdom
1.8 (Q3)
5.9 (Aug)
1.2 (Oct)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for unified Germany.
Weekly Economic Briefing
11
December 10, 1999
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
Copied
with the assistance of the Office of the Vice President
November 19, 1999
Baily
Podesta
(entire report)
CHART OF THE WEEK
U.S. Tariff Rates, 1900-1998
60
50
Average tariff on dutiable imports
40
Percent of import value
Average tariff on all imports
30
20
10
Tariff Act of 1930
(Smoot-Hawley)
Creation of GATT
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
Until the rounds of multilateral trade negotiations after World War II, U.S. tariff
rates were quite high. Tariffs on dutiable imports reached almost 60 percent
under the Smoot-Hawley tariff act. By 1998, however, the average tariff rate was
4.7 percent on dutiable imports and 2.0 percent on all imports.
CONTENTS
SPECIAL ANALYSES
Who Is the Most Open of Them All?
1
Y2K Effects in Financial Markets
3
ARTICLE
Patents and Innovation in the On-line World
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
V.(wohn
"Any intellectual property yet. boney?"
SPECIAL ANALYSIS
Who Is the Most Open of Them All?
Through successive GATT/WTO rounds, world tariffs have been reduced from an
average of 40 percent in 1947 to roughly 4 percent today. However. tariffs still
exhibit wide variation, both across countries and across sectors within a country.
One motivation for U.S. participation in negotiating lower tariffs at the WTO is
that, on average, our rates are lower than those of our major trading partners. It
also turns out that although we have a few products with very high tariff rates, we
have fewer high tariffs than Japan or the European Union.
Uruguay Round commitments. At the WTO, the United States has committed
to "binding" its overall MFN tariff rates to an average of 4.1 percent. This
compares with 5.1 percent for Japan
Post-Uruguay Round Average Tariff Rates
and 7.4 percent for the EU (see upper
25
EU-15
chart). These differences are due
Japan
20
U.S.
mainly to the higher protection
accorded to agricultural products
15
Percent
elsewhere: 19.5 percent in the EU and
10
11.7 percent in Japan, compared with
the much lower 5.5 percent in the
5
United States. Rates for industry
0
(manufacturing products) are much
Overall
Agriculture
Industry
more uniform.
Highly protected sectors. The lower chart compares the average tariff rates for
several product groups, ranked by the degree of protection received in the United
States. The footwear industry is the
Post-Uruguay Round Average Bound
most protected U.S. sector, with an
Tariff Rates for Selected Products
average rate of 13 percent for the
Arms and ammunition
US
combined footwear, and headgear
Plastics and rubber
Japan
product group. While this exceeds the
Vegetable products
EU-15
EU rate of 8 percent, it is much lower
Fats and oils
than the Japanese average of 26
Live animals and products
percent. The textile and apparel
Hides and skins
industry, another highly protected
Prepared food
sector in the United States, has an
Textile and articles
average tariff of 8.0 percent, similar to
Footwear and headgear
the average for the EU (7.9 percent)
0
5
10
15
20
25
30
and above that for Japan (6.6 percent).
Percent
Distribution of tariff rates. As averages may conceal as well as reveal. it is also
useful to examine the dispersion of tariff rates. Out of roughly 10,000 tanti cases
recorded for each group of countries. 66 percent of the U.S. tariffs are 5 percent or
lower. By contrast, 54 percent of EU tariffs and 59 percent of Japanese tariffs are
5 percent or under. While both the EU and the United States have 98 percent of
Weekly Economic Briefing
1
November 19, 1999
their rates at or below 20 percent. only 94 percent of Japanese rates lie in this
range.
Who has the highest of them all? The United States actually has a few products
whose tariff rates exceed any in Japan or the EU. Seven tobacco products have
rates above 300 percent, and five peanut products have rates over 100 percent.
The highest EU rate is 89 percent (also for a tobacco product) while the highest
Japanese rate is 60 percent. However. the United States has fewer of these high-
rate categories than either the EU or Japan. While the United States has only 170
categories with rates between 20 and 60 percent, the Europeans have 242 such
categories and the Japanese 514.
Tariff peaks are costly. From a purely economic perspective, tariff-induced
economic costs rise with the square of the tariff rates, as a rough rule of thumb.
Thus a 2 percent tariff is four times as inefficient, and a 3 percent tariff is nine
times as inefficient as a 1 percent tariff. Because businesses and firms make
production decisions based on price signals, distorting prices by putting 10
percent tariffs on some, but not all, products is probably more inefficient than
applying an across-the-board 5 percent rate.
Possible benefits. While economic arguments point to evening out tariff peaks,
there may nonetheless be important political reasons for preserving them.
Granting high protection to a few politically sensitive sectors may allow more
tariff reductions in other sectors, resulting not only in lower overall protection, but
also in greater economic benefits.
Weekly Economic Briefing
2
November 19, 1999
SPECIAL ANALYSIS
Y2K Effects in Financial Markets
Financial sector disruptions both here and abroad have been a central concern
related to the coming century date change. The smooth and efficient operation of
financial markets and the banking sector relies on the extensive use of computers
for record keeping, financial accounting, and electronic transactions. Studies by
the Federal Reserve and the President's Council on Year 2000 Conversion report
that federally insured financial institutions are very well-prepared for the year
2000 date change. Data from banks and financial markets provide additional
information on the preparations underway and the magnitude of anticipated Y2K-
related disruptions to the financial system.
Year-end interest rate indicators. One measure of expected Y2K disruptions is
the premium lenders receive for providing funds around the end of the year. This
is measured in the chart by the difference between the rate on futures contracts in
one important market for deposits running from mid-December to mid-January
and the average of the rate on contracts
LIBOR Futures Rate Year-End Spreads
140
running from mid-November to mid-
December 1999 and the rate on
120
'999
contracts running from mid-January to
100
mid-February 2000. The spread on
Basis points
80
year-end 1999 contracts has been
60
running well above the spread on
1998
40
comparable year-end 1998 contracts at
comparable times a year ago and
20
reached a peak of 120 basis points in
0
October. Partly as a result of Fed
Sep
Oct
Nov
actions to assure markets that ample
liquidity will be available at year-end, and partly as a result of a general easing of
concerns regarding Y2K-related risks to financial markets, this spread has fallen
to about 65 basis points. Other comparable year-end premiums (on fed funds
futures and Treasury repurchase agreements) are even smaller. Evidently, market
participants generally expect that Y2K disruptions will have only minor
repercussions on financial markets.
Banks are building up stockpiles of vault cash. In addition to its role in
soothing concerns over year-end liquidity, the Federal Reserve has also acted to
ensure that sufficient quantities of cash are available to the public at year-end. It
is widely believed that many people intend to withdraw abnormally large amounts
of cash near the end of the year as a precaution against Y2K-related failures at
banks and ATMs. In anticipation of this rise in demand for cash, the Fed
increased the value of its order for currency through September by over 50
percent from the previous year. It has also implemented measures making it
easier for banks to order and take delivery of cash. Starting in September, banks
began building up their holdings of vault cash, which now stand about 30 percent
Weekly Economic Briefing
3
November 19, 1999
Vault Cash Held by Banks
higher than at the same time last year
60
(see chart). One of the reasons this
55
build-up started so early is that
1999
armored carriers are normally in
50
Dollars (billions)
short supply during the Christmas
45
shopping season. So far, however.
public holdings of currency are
40
1998
running at normal levels. Evidently,
35
the public plans to wait until the last
minute to get its Y2K cash.
30
Sep
Oct
Nov
Dec
Conclusion. Indications from banks
and financial markets suggest that the combined efforts by government agencies
and private financial institutions to prepare for Y2K have been successful overall.
Financial markets appear to expect relatively minor century-date change
disruptions.
Weekly Economic Briefing
4
November 19, 1999
ARTICLE
Patents and Innovation in the On-line World
Three recent lawsuits raise the question of how Internet-based companies' ability
to patent their business processes would affect on-line competition.
Background. On October 13, priceline.com sued Microsoft for infringing on its
patent for a sales mechanism that allows buyers to submit price bids to sellers for
airline tickets and other products. Then, on October 21, Amazon.com sued
barnesandnoble.com for infringing on its patent for a purchasing method that
allows customers to buy products with a single mouse click. Finally, on October
22, Trilogy Software alleged that CarsDirect.com infringed on its patent for a
method that allows shoppers to customize their purchases by choosing among a
variety of options. These companies might have decided to bring their suits in
any case, but the legal environment may also have changed following an appeals
court decision last year that some commentators have interpreted as possibly
making it easier to patent business processes.
The economics of patents. An Internet company would want to patent a business
practice for the same reason that a pharmaceutical company would want to patent
a new drug-to gain a competitive advantage. Moreover, without some
protection against competitors' simply appropriating an innovation, companies
would have little incentive to invest in R&D. Society's decision to offer patent
protection involves a trade-off between the costs of granting temporary monopoly
power and the benefits from stimulating more innovation. Patents are
inappropriate in cases where the costs clearly outweigh the benefits. For example,
"natural laws," such as the laws of physics, are not patentable. On economic
grounds, this would be justified to the extent that they are so inextricably
embedded in a wide variety of innovations that the costs of their being
monopolized would most likely be huge. Finer gradations than simply granting or
denying a patent are also possible (for example, restricting the scope of a patent
based on the novelty of the innovation). Once again, the economic decision is
whether the benefits of encouraging innovation outweigh the costs of
monopolization.
The case for on-line business process patents. Five years ago, no one sold
products on-line. The first electronic commerce companies had to adapt standard
business practices like the use of credit cards to the on-line environment. But
they also had to develop new solutions to new problems. Amazon.com, for
example, developed its patented, streamlined purchasing process, because it
believed that it was losing sales by requiring customers to enter billing and credit
card information with each purchase. However, such investment may be difficult
to protect from imitators without patent protection. One reason is that
may be easier in cyber space than it is in the physical world, where other barners,
such as start-up costs, can provide protection even without a patent. For example,
the New York Times invested $350 million for a printing press to print the first
Weekly Economic Briefing
5
November 19, 1999
page of the newspaper in color. On-line, the ability to display color graphics is an
integrated part of web browsers like Netscape's Navigator and Microsoft's
Explorer.
The case against on-line business patents. Ironically, the case for limiting the
patenting of on-line business processes draws on many of the same features of e-
commerce as the case for expanding the scope of such patents. The fact that all
on-line business practices are new means that a large number are potentially
patentable. Restricting access to these innovations could seriously hamper the on-
line world's famously frenetic pace of innovation and growth and might provide
too great an advantage to the early holders of broad patents. In the extreme, it
could amount to the physical equivalent of building a fast food restaurant while
having to pay one party for the use of a drive-through window, someone else for
incorporating a playground, and another for the very idea of running a fast food
restaurant.
Finally, even though conventional barriers to entry like start-up costs may be low,
the on-line world may have barriers of its own. One might be the importance of
reputation. As the number of processes for facilitating sales (such as 1-click
shopping) grows, the job of an on-line merchant may well become amalgamating
components so as to make accessing the merchant's core product easier. The use
of specific processes will become less important than having a reputation for
providing an easily accessible site. Gaining a reputation for being the first to
develop and incorporate new services might provide a powerful incentive for
research and development even in the absence of patent protection.
Conclusion. On-line companies are looking to protect their investments in
developing innovative business practices. The challenge for policymakers is to
determine whether the unique characteristics of the on-line world call for striking
a balance between the costs of granting a temporary monopoly and the gains from
stimulating greater innovation that is different from the balance that is embodied
in current patent law and practice.
Weekly Economic Briefing
6
November 19, 1999
THE PRESIDENT HAS SEEN
11-29-99
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
FCC Issues High-Speed Internet Access Decision. Yesterday, the Federal
Communications Commission adopted rules to promote competition in providing
copied
high-speed Internet access by directing local telephone companies to share their
telephone lines with other access providers. This decision will enable competitive
sperling
carriers to provide Digital Subscriber Line (DSL)-based services over the same
Reed
telephone lines simultaneously used by the incumbent phone company for basic
telephone service, a technique referred to as "line-sharing." Incumbents are
HRC
already using line sharing technology to offer basic telephone service and DSL
services over the same line. Now customers can use an alternative provider of
Podesta
high-speed Internet access without having to purchase a second line. The FCC's
Order is intended to ensure that as many companies as possible will be able to
(page 7 only
deploy new technologies on a faster, more cost-effective basis, and should benefit
residential and small business customers.
Lending to Minority Home Buyers Is up, but So Are Denials. Home-purchase
lending to low-income and minority households has expanded faster than lending
to other borrowers in recent years, according to a new Federal Reserve study. For
example, the number of conventional (non-government backed) home-purchase
loans extended to low-income borrowers increased by 75 percent between 1993
and 1998, compared with a 52 percent rise among upper-income borrowers. At
the same time, however, an increasing proportion of mortgage applicants,
including low-income and minority applicants, have been denied. The study
concludes that increased lending for subprime and (especially) manufactured-
home mortgages plays a key role in explaining both the increased availability of
credit to lower-income borrowers and the recent rise in denial rates for
conventional home-purchase loans. (Subprime mortgages are those that exceed
the level of credit risk that the government-sponsored enterprises Fannie Mae and
Freddie Mac are willing to accept; manufactured homes are assembled in a
factory and transported to the purchaser's site.) These mortgages are oriented
toward lower-income and relatively less-creditworthy buyers and thus tend to be
characterized by higher denial rates. Such mortgages were 14 percent of all
conventional home-purchase mortgages in 1998, up from 5 percent in 1993.
EITCs Spread to States and Now to Counties. Last month, Montgomery
County, Maryland, enacted what appears to be the first county "EITC" in the
nation-a refundable tax credit equal to 10 percent of the Federal EITC. Eight
3 Bluck u THE
states currently have refundable credits (Colorado, Kansas, Maryland,
Massachusetts, Minnesota, New York, Wisconsin, and Vermont) and three states
have non-refundable credits (Iowa, Oregon, and Rhode Island). Seven of these 11
states have enacted or expanded their state credits since 1997. Most state credits
range in generosity from 5 percent to 27 percent of the Federal EITC, although
some offer higher credits in certain circumstances. Families in Wisconsin and
Minnesota, for example, may be eligible for credits of up to 43 percent and 46
percent, respectively, of the Federal EITC. States finance their credits mainly
through general funds, although states can use their TANF block grant to cover a
portion of the cost of refundable credits.
Weekly Economic Briefing
7
November 19, 1999
THE PRESIDENT HAS SEEN
11-20-99
INTERNATIONAL ROUNDUP
ILO Concludes That Child Labor Can Be Reduced. In a recent report on the
achievements of the International Program for the Elimination of Child Labor
(IPEC), the International Labor Organization suggests that eliminating child labor
is a feasible objective. Major accomplishments of the IPEC include introducing
an innovative process of workplace monitoring along with social protection for
affected children and their families, intensifying efforts to target the worst forms
of child labor, and expanding IPEC in Africa. The report estimates that 130,000
working children directly benefited from the program during 1998-99, including
16 percent who were withdrawn from work or trafficking, 11 percent who were
removed from hazardous working conditions, and 20 percent who went into the
formal education system One notable success was a workplace monitoring
system introduced in the Bangladesh garment industry in 1995, at a time when 43
percent of factories employed children. By 1998, this percentage had fallen to 5
percent. An estimated 250 million children aged 5 to 14 are engaged in economic
activities worldwide. Seventy percent are in the agricultural sector, but the worst
injury and illness rates are found in construction, mining, and transport.
Assessing Developing Countries' Telecom Reform. Liberalization of
telecommunications policies in developing countries since the 1980s has
substantially improved industry performance, and the more radical has been the
reform, the greater has been the improvement, according to a recent study. The
paper notes that a monopoly is likely to exist, at least temporarily, in the early
stages of liberalization, and it advises countries to control monopolistic behavior
in order to benefit consumers and the national economy. However, good
regulation may be too expensive for some countries. Hence, the study
recommends that developing nations create joint regional authorities to regulate
telephone companies. This approach would allow the regulator to develop
specialized expertise at a scale that a lone developing country cannot afford; it
would also allow the regulator to use information about technology, costs, and
demand in one country to detect inefficiencies in another country.
U.S. Tax Burden Is Low among OECD Countries. New estimates released by
the Organization for Economic Co-operation and Development show that in 1997
the United States continued to have one of the lowest ratios of tax revenues to
GDP among OECD countries. Revenues collected at all levels of government
were 29.7 percent of GDP in the United States, compared with rates in excess of
45 percent in Sweden, Denmark, Finland, Luxembourg, Belgium, and France.
Sweden (51.9 percent) was the lone country whose general government revenue
exceeded 50 percent of GDP. Only Mexico, Korea, Turkey, and Japan had tax
shares lower than the United States', with Mexico's 16.9 percent the lowest of Jll.
Between 1965 and 1997, revenues as a share of GDP increased from 28 to 42
percent in the European Union 15, compared with a rise from 25 to 28 percent in
the North American countries (the United States, Canada, and Mexico).
Weekly Economic Briefing
8
November 19, 1999
RELEASES THIS WEEK
U.S. International Trade in Goods and Services
The goods and services trade deficit was $24.4 billion in
September; it was $23.5 billion in August.
Housing Starts
Housing starts in October were virtually unchanged from
September at 1.628 million units at an annual rate. For the first 10
months of 1999, housing starts are 3 percent above the same
period a year ago.
Consumer Price Index
The consumer price index increased 0.2 percent in October.
Excluding food and energy, consumer prices also rose 0.2 percent.
Industrial Production and Capacity Utilization
The Federal Reserve's index of industrial production increased 0.7
percent in October. Capacity utilization rose 0.3 percentage point
to 80.7 percent.
MAJOR RELEASES NEXT WEEK
Advance Durable Shipments and Orders (Tuesday)
Gross Domestic Product (Wednesday)
Weekly Economic Briefing
9
November 19, 1999
U.S. ECONOMIC STATISTICS
1970-
1993
1998
1999:1
1999:2
1999:3
Percent growth (annual rate)
Real GDP (chain-type)
3.0
4.6
3.7
1.9
4.8
GDP chain-type price index
5.2
1.1
2.0
1.3
1.0
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.7
3.1
2.7
0.6
4.2
Real compensation per hour:
Using CPI
1.0
3.9
2.8
1.2
2.2
Using NFB deflator
1.5
4.7
2.9
2.9
4.4
Shares of Nominal GDP (percent)
Business fixed investment
11.4
12.5
12.6
12.6
12.8
Residential investment
4.5
4.2
4.4
4.5
4.4
Exports
8.2
11.0
10.7
10.7
10.9
Imports
9.2
12.7
12.9
13.4
13.9
Personal saving
6.6
2.6
2.2
1.8
1.5
Federal surplus
-2.8
0.5
1.1
1.3
N.A.
1970-
August
September
October
1993
1998
1999
1999
1999
Unemployment Rate (percent)
6.7**
4.5**
4.2
4.2
4.1
Payroll employment (thousands)
increase per month
129
41
310
increase since Jan. 1993
19794
Inflation (percent per period)
CPI
5.8
1.6
0.3
0.4
0.2
PPI-Finished goods
5.0
0.0
0.5
1.1
-0.1
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Weekly Economic Briefing
10
November 19, 1999
FINANCIAL STATISTICS
September
October
Nov. 18,
1997
1998
1999
1999
1999
Dow-Jones Industrial Average
7441
8626
10714
10397
11036
Interest Rates (percent per annum)
3-month T-bill
5.06
4.78
4.68
4.86
5.08
10-year T-bond
6.35
5.26
5.92
6.11
6.06
Mortgage rate, 30-year fixed
7.60
6.94
7.82
7.85
7.69
Prime rate
8.44
8.35
8.25
8.25
8.50
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
November 18, 1999
Week ago
Year ago
Euro (in U.S. dollars)
1.030
-1.3
N.A.
Yen (per U.S. dollar)
105.9
1.2
-12.8
Major currencies index (Mar. 1973=100)
93.16
0.6
-0.6
(trade-weighted value of the U.S. $)
Real GDP
Unemployment
CPI Inflation
International Comparisons W
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
4.1 (Q3)
4.1 (Oct)
2.6 (Oct)
Canada
3.7 (Q2)
7.5 (Sep)
2.5 (Sep)
Japan
0.9 (Q2)
4.7 (Sep)
-0.2 (Sep)
France
2.1 (Q2)
11.0 (Sep)
0.7 (Sep)
Germany
0.6 (Q2)
9.1 (Sep)2
0.6 (Sep)
Italy
0.8 (Q2)
12.1 (Apr)
1.8 (Sep)
United Kingdom
1.8 (Q3)
5.9 (Jul)
1.1 (Sep)
1/ For unemployment data. rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for unitied Germany.
Weekly Economic Briefing
11
November 19, 1999
CC: MNB
RRL
AC
THE PRESIDENT HAS SEEN
CS
11-13-99
'99 NOV 12 PM12:43
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
capied
Baily
November 12, 1999
Podista
Pg pg 6
Jennings
CHART OF THE WEEK
Podesta
Goods and Services Exports as Share of Sector GDP
40
7
35
6
Services exports
30
(right scale)
5
Percent of goods GDP
25
4
20
3
15
Percent of services GDP
2
10
Goods experts
5
(left scale)
1
0
0
1929
1939
1949
1959
1969
1979
1989
=
For both goods and services, exports have grown much faster than output,
especially in the last decade. For services, which include travel and
transportation, telecommunications, education, and a variety of financial and
business services, exports were more than 50 percent greater as a share of
services GDP in 1998 than they were in 1985.
MACROECONOMIC UPDATE
Fourth Quarter Starts Out Strong
Macroeconomic forecasters (on average) are expecting the economy to grow at
about a 4 percent annual rate in the fourth quarter. This rate is consistent with
October's strong labor market and may reflect expectations of extra inventory
accumulation aimed at creating a buffer against possible Y2K disruptions.
Jobs. The jump in payroll employment of 310,000 in October showed that the
labor market remains very strong and that the anemic September job growth was
probably attributable to Hurricape Floyd. Weekly data on initial claims for
Personal Consumption of Goods
unemployment insurance suggest that
2700
demand for labor remained strong
Oct 99
through the first week of November.
Billions of 1996 dollars (annualized)
(estimated)
2600
Spending. Personal consumption of
goods thus far in the fourth, quarter
appears to have slowed substantially
2500
from the pace of earlier quarters (see
upper chart). Motor vehicle sales
dropped in October for the second
2400
1998:Q3 1998:Q4 1999:Q1 1999:Q2 1999:Q3 1999:Q4
consecutive month, but 1999 is still
likely to be the best sales year on
Prices of Domestic and Imported Goods
record. Spending on other goods has
6
posted sizable gains in the past 3
4
Core PPI
months-though October's gain was
excluding tobacco
smaller than that of the past 2 months
12-month percent change
2
0
Inflation. Strong productivity growth
-2
and falling non-oil import prices have
-4
held inflation in check for the past 4
Non-oil import prices
years. Productivity, which increased
-6
1991
1992
1993
1994
1995
1996
1997
1998
1999
2.9 percent over the past 4 quarters,
remains as strong as ever. However,
import prices are no longer falling sharply, possibly because of a resurgence of
growth abroad. Prices of imported oil dropped sharply in 1998 but rebounded
dramatically in 1999. Falling prices of non-oil imports had restrained the pricing
power of domestic goods producers (illustrated by the core PPI excluding tobacco
in the lower chart). Non-oil import prices fell through April but have been
roughly flat since then.
Conclusion. The economy appears to be growing strongly in the fourth quarter.
With continued tight labor markets and the change in the import price
environment, continued strong productivity growth appears to be the key to
keeping inflation tame in the coming year.
Weekly Economic Briefing
1
November 12, 1999
THE PRESIDENT HAS SEEN
SPECIAL ANALYSIS
11-13-99
Poverty and Family Structure
The good news is that in 1998 the poverty rate among female headed families
with children age 18 was the lowest it has been in data that go back to 1959.
The bad news is that it was still 38.7 percent. This rate stands in marked contrast
to the 6.9 percent poverty rate among married-couple families with children. The
question naturally arises whether encouraging families to form and stay together
could significantly reduce the overall poverty rate.
Trends. Whether white, black, or Hispanic, married-couple families with
children under age 18 have much lower poverty rates than single-mother families
Family Poverty Rate by Type of Family
(see chart). Although black and
70
Hispanic single mother
Hispanic rates have come down in
Black
60
single
recent years, they remain higher than
mother
50
those of whites in each family type.
Nevertheless, it is noteworthy that the
White single mother
Percent
40
poverty rate for black married-couple
30
families with children (about 40
Hispanic married couple
20
percent of all black families with
Black married couple
10
children) fell to 8.6 percent in 1998.
White married couple
This rate is close to the rate for whites
0
1959 1964 1969 1974 1979 1984 1989 1994
of 6.6 percent.
Why are single-parent rates higher? A one-parent family typically has less
earning capacity than a two-parent family simply because it has fewer potential
adult earners. Moreover, single mothers who work often earn less than adult men
in married-couple families, because less-skilled women typically have much
lower earnings than less-skilled men. Single parents might also be seriously
limited by parental responsibilities and child-care availability as to when and how
much they can work. Finally, married-couple families can benefit from
economies of scale in living costs. For example, the income required to keep two
single-parent-with-one-chilo families out of poverty is almost $6,000 greater than
the income required to keep a married couple with two children out of poverty
according to the current official poverty thresholds.
Selection issues. People who become single parents may also have different
characteristics from those who marry and stay married, and these differences may
increase the likelihood of adverse economic outcomes. In the case of teenage
mothers (the majority of whom are unmarried), for example, recent evidence
suggests that factors other than the disruptive effects of having a child at a young
age (such as family background) may explain a large portion of why teenage
mothers fare worse economically than young women who delay their
childbearing.
Weekly Economic Briefing
2
November 12, 1999
Race differences. Racial and ethnic differences in the proportion of single
mothers who have never been married or are divorced can explain some of the
disparity in poverty rates across racial and ethnic groups. In particular, 63 percent
of black female family heads have never been married, compared with 28 percent
for whites; only 17 percent are divorced, compared with 44 percent for whites.
This means they are likely to receive fewer resources from fathers. In 1993, for
example, never-married mothers were less likely to have a child support award
than divorced mothers (44 percent versus 73 percent) and, if they actually
received support, it was a much smaller amount ($1,700 versus $3,600).
Policy implications. The benefits of marriage and raising children with two
parents are clear and can be seen in this comparison of poverty rates.
Unfortunately, research suggests that the reasons for high poverty rates among
single mothers reflect more than just the absence of a spouse. Addressing these
underlying problems would seem to be an important complement to policies
aimed at discouraging out-of-wedlock births and encouraging families to stay
together. That said, efforts to improve paternity establishment and child support
enforcement can play an important role in providing greater resources to single-
parent families.
Weekly Economic Briefing
3
November 12, 1999
THE PRESIDENT HAS SEEN
11-13-99
ARTICLE
What Comes Next in the Microsoft Case?
Last Friday Judge Thomas Penfield Jackson released findings of fact in the
antitrust case against Microsoft. The next scheduled step is the issuance of
conclusions of law, followed if necessary by the determination of appropriate
remedies. It is possible that the parties could negotiate a settlement at any time in
the process.
Findings of fact. Judge Jackson found that Microsoft had monopoly power in the
manufacture of operating systems and that it used that power to preserve its
position by forestalling competition. He found that an operating system, such as
Windows 98, includes a collection of programs called Application Product
Interfaces (APIs), designed to provide other programs with a means of interacting
with the computer's hardware. He concluded not only that Microsoft was the
major supplier of these APIs but also that the company tried to prevent other
companies from developing their own APIs or programs that might perform
similar functions.
Effects on competitors. Judge Jackson cited numerous instances in which
Microsoft leveraged its monopoly status to the detriment of competitors,
including ones involving Sun's Java, Netscape's Navigator, IBM's OS2, and
Intel. In the mid-1990s, for example, Intel developed new PC microprocessor
features that it felt Microsoft's Windows did not fully support. Intel decided to
write its own interface programs to allow software developers to access these
advanced features. The Judge found that Microsoft, in order to prevent Intel's
entry into the API market, pressured major computer manufacturers not to install
the software and threatened not to support Intel processors in subsequent versions
of Windows unless Intel stopped developing interface software. Faced with such
pressure, Intel relented.
Effects on consumers. Judge Jackson found that Microsoft's actions had serious
and far-reaching impacts on consumers besides limiting access to new hardware
features. First, by unnecessarily tying its Web browser Explorer to Windows,
Microsoft forced all manufacturers to ship computers with this browser. This
forced businesses and consumers who did not want to use Explorer to incur the
cost of using an operating system that was unnecessarily slow and took up more
storage space than one without a browser. Similarly, the Judge concluded,
Microsoft forced consumers to use overly complicated technology by preventing
software manufacturers from adding software that eased consumers' introduction
to their new computers. What the judge found most problematic, however, was
that Microsoft deterred other companies from producing any software that could
intensify competition against one of its core products by developing a reputation
for punishing such efforts.
Weekly Economic Briefing
4
November 12, 1999
Next steps. Judge Jackson has ordered the parties to file memoranda of law with
respect to the conclusions of law that the Court should draw. He further ordered
that these memoranda should not address the subject of remedy, or injunctive
relief, which will be addressed in a separate briefing if warranted. The current
schedule calls for the Judge to have these memoranda of law by January 31, 2000.
The issue of remedy thus remains speculative at this point. However, remedies in
antitrust cases typically fit into two basic categories:
Structural remedies such as the AT&T divestiture try to eliminate monopoly
by breaking firms with monopoly power into pieces. In the case of AT&T,
the settlement separated the long-distance company from the local telephone
companies, removing any ability for AT&T to use monopoly control of the
local market to limit competition in the long-distance market. Some have
argued that a break-up of Microsoft might not resolve the underlying
competitive problem identified by the Court, because separation of the
applications segment of the company (word processors and spreadsheets)
from the operating system market would not end the monopoly in the latter.
Behavioral remedies would require Microsoft to abandon problematic
business practices without changing the structure of the company. Behavioral
remedies in the Microsoft case might include providing universal access to
technical specifications, requiring uniform pricing, or separating the browser
functions from the operating system. It remains a question, in light of the
findings of fact, whether such behavioral remedies would work if Microsoft is
allowed to retain its monopoly in the operating system market, because the
company would still have an incentive to deter future entry and because no list
of prohibited activities could ever be exhaustive. In fact, in the consent decree
from Justice's previous suit against Microsoft, Microsoft agreed to avoid
specific contractual relationships with manufacturers and to avoid using other
exclusionary practices that achieve similar effects.
Conclusion. The Court found that Microsoft has monopoly power, which it has
used to forestall competition. If the Court subsequently rules that Microsoft has
violated the antitrust laws, the design of appropriate remedies will involve
complicated economic and legal considerations.
Weekly Economic Briefing
5
November 12, 1999
THE PRESIDENT HAS SEEN
11-13-99
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Study Examines Medicaid Enrollment Decline. National Medicaid enrollment
for low-income children and their parents declined by 2 percent in 1996 and by an
estimated 3 percent in 1997, despite program eligibility expansions in many states
and enhanced Federal funding through the Children's Health Insurance Program
(CHIP). A recent study investigated these declines by examining Medicaid
eligibility policies and operations in five states-California, Colorado, Florida,
a
Minnesota, and Wisconsin. The study found that policy changes from Federal
legislation, state decisions, and litigation have created complicated Medicaid
eligibility rules that are often difficult for applicants, beneficiaries, and staff to
understand. States' automated eligibility determination systems (which handle
applications for Medicaid, welfare, and food stamps) were also found to be
3 5 ANY
inadequate because they were designed to meet welfare, not Medicaid, needs. The
study concludes that, along with better outreach, states should reassess their
Medicaid eligibility requirements and systems to make them more efficient,
accessible, and understandable. It also urges better coordination between welfare
and Medicaid systems so that families who leave welfare understand the
copied
availability of Medicaid coverage.
Jennings
Podesta
Racial Differences in Sources of Small Business Financing. According to a
recent study examining small businesses in two ethnic Chicago neighborhoods,
the start-up capital in black-owned businesses was an estimated 46 percent less
than that in comparable Hispanic-owned businesses. However, the amount of
personal funding used to start businesses was roughly the same for black and
Hispanic owners after adjusting for business and individual characteristics other
than race. Although they were unable to estimate precise numbers for other
sources of funding, the authors inferred from their data that the smaller amount of
start-up capital for black owners may reflect a lack of access to informal capital
(such as loans and gifts from family, friends, and business associates). The
authors argue that the apparent importance of informal sources of funding
suggests that it is worth exploring ways to combine the presumed flexibility and
informational advantages of informal networks with the formal sector's ability to
raise capital-perhaps through community development financial institutions and
micro-lending pools.
Economic Conditions Have Helped Lower Juvenile Crime. According to a
new study, declines in the unemployment and poverty rates between 1993 and
1996 explain 28 percent of the reduction in juvenile crime during the period. The
study uses nationally representative data on over 16,000 high school students in
1995 to estimate the effect of personal, family, and neighborhood
characteristics-as well as deterrence measures such as police spending and arrest
rates by county-on juveniles' propensities to commit crime. It then uses these
results to estimate how the decline in unemployment and poverty rates have
affected juvenile crime. The study concludes that juveniles respond to both
incentives and sanctions, and that employment opportunities, increased family
income, and more strict deterrence are effective tools to reduce juvenile crime.
Weekly Economic Briefing
6
November 12, 1999
INTERNATIONAL ROUNDUP
Europe Tightens Monetary Policy. Amid signs that European growth is
strengthening, the European Central Bank (ECB) raised interest rates by 0.5
percentage point last week, bringing the main refinancing rate to 3 percent. This
was accompanied in London by the Bank of England's raising rates by 0.25
percentage point to 5.5 percent. The ECB's decision reversed the rate reductions
made in April and reflected a view that the balance of risks had shifted toward
higher inflation-though it is worth noting that the euro-zone unemployment rate
was 10 percent in September and consumer prices were only 1.2 percent higher
than a year earlier. The rate hike appears to be motivated by a desire to keep
inflation expectations safely below the ECB's target ceiling of 2 percent per year.
New Venture Launched to Fight Malaria. In a first for international public
health, public agencies and the private sector recently joined together to create a
unique organization to develop anti-malarial drugs that would not otherwise be
brought to market. The World Health Organization (WHO), the International
Federation of Pharmaceutical Manufacturers Associations, and the World Bank
are among the sponsors of the partnership-dubbed the Medicines for Malaria
Venture (MMV). The MMV aims to register, on average, one new anti-malarial
drug every 5 years. According to the WHO, about $150 million will be required
to bring each new drug to market and make it accessible. The pharmaceutical
industry will complement this financial outlay with "in kind" support, such as
access to chemical libraries. An estimated 300 to 500 million malaria cases are
contracted worldwide each year, resulting in one million deaths. The direct and
indirect costs of malaria in sub-Saharan Africa exceed $2 billion per year,
according to one estimate.
Unrealized Hopes in Transition Economies. Hopes that privatization in
transition economies would create the foundation for improved governance and
transform the ties between the state and firms have not been fully realized,
according to the European Bank for Reconstruction and Development's
Transition Report 1999. Rather, enterprises in these economies spend
considerable resources lobbying state officials, paying bribes, and adjusting to
state interference. In return, enterprises receive benefits in the form of subsidies,
soft finance, preferential tax treatment, and the tolerance of arrears. A survey of
3,000 firms in 20 transition economies confirms that corruption is a major
problem in these countries, particularly for small businesses. Thirty-seven
percent of small enterprises report paying bribes frequently, compared with only
16 percent of large enterprises. The average bribe paid by small firms is also
higher, absorbing 5.4 percent of annual revenues, nearly double the 2.8 percent
paid by large firms. New firms also tend to pay higher bribes. The average
"bribe tax" is generally higher in the Commonwealth of Independent States (5.7
percent of company revenues), than in central and eastern Europe (3.3 percent).
The report also finds that privatized firms pay a bribe tax similar to that paid by
state-owned firms.
Weekly Economic Briefing
7
November 12, 1999
RELEASES THIS WEEK
Productivity
Nonfarm business productivity rose at an annual rate of 4.2 percent
in the third quarter. Manufacturing productivity rose 3.4 percent.
Retail Sales
Advance estimates show that retail sales were unchanged in
October following a decrease of 0.1 percent in September.
Excluding sales in the automotive group, retail sales rose
0.5 percent following an increase of 0.6 percent.
Producer Price Index
The producer price index for finished goods fell 0.1 percent in
October. Excluding food and energy, producer prices rose 0.3
percent.
MAJOR RELEASES NEXT WEEK
Industrial Production and Capacity Utilization (Tuesday)
Consumer Prices (Wednesday)
Housing Starts (Wednesday)
U.S. International Trade in Goods and Services (Thursday)
Weekly Economic Briefing
8
November 12, 1999
U.S. ECONOMIC STATISTICS
1970-
1993
1998
1999:1
1999:2
1999:3
Percent growth (annual rate)
Real GDP (chain-type)
3.0
4.6
3.7
1.9
4.8
GDP chain-type price index
5.2
1.1
2.0
1.3
1.0
Nonfarm business (NFB) sector:
Productivity (chain-type)
N.A.
3.1
2.7
0.6
4.2
Real compensation per hour:
Using CPI
N.A.
3.9
2.8
1.2
2.2
Using NFB deflator
N.A.
4.7
2.9
2.9
4.4
Shares of Nominal GDP (percent)
Business fixed investment
11.4
12.5
12.6
12.6
12.8
Residential investment
4.5
4.2
4.4
4.5
4.4
Exports
8.2
11.0
10.7
10.7
10.9
Imports
9.2
12.7
12.9
13.4
13.9
Personal saving
6.6
2.6
2.2
1.8
1.5
Federal surplus
-2.8
0.5
1.1
1.3
N.A.
1970-
August
September
October
1993
1998
1999
1999
1999
Unemployment Rate (percent)
6.7**
4.5**
4.2
4.2
4.1
Payroll employment (thousands)
increase per month
129
41
310
increase since Jan. 1993
19794
Inflation (percent per period)
CPI
5.8
1.6
0.3
0.4
N.A.
PPI-Finished goods
5.0
0.0
0.5
1.1
-0.1
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Weekly Economic Briefing
9
November 12, 1999
FINANCIAL STATISTICS
September
October
Nov. 10,
1997
1998
1999
1999
1999
Dow-Jones Industrial Average
7441
8626
10714
10397
10598*
* The close on Nov. 11 was 10595
Interest Rates (percent per annum)
3-month T-bill
5.06
4.78
4.68
4.86
5.05
10-year T-bond
6.35
5.26
5.92
6.11
6.00
Mortgage rate, 30-year fixed
7.60
6.94
7.82
7.85
7.67
Prime rate
8.44
8.35
8.25
8.25
8.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
November 10, 1999
Week ago
Year ago
Euro (in U.S. dollars)
1.044
-0.0
N.A.
Yen (per U.S. dollar)
104.6
0.1
-14.9
Major currencies index (Mar. 1973=100)
92.56
0.2
-1.8
(trade-weighted value of the U.S. $)
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
4.1 (Q3)
4.1 (Oct)
2.6 (Sep)
Canada
3.7 (Q2)
7.5 (Sep)
2.5 (Sep)
Japan
0.9 (Q2)
4.7 (Sep)
-0.2 (Sep)
France
2.1 (Q2)
11.0 (Sep)
0.7 (Sep)
Germany
0.6 (Q2)
9.1 (Sep)
0.6 (Sep)
Italy
0.8 (Q2)
12.1 (Apr)
1.8 (Sep)
United Kingdom
1.8 (Q3)
5.9 (Jul)
1.1 (Sep)
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for unified Germany.
Weekly Economic Briefing
10
November 12, 1999
99 NOV 5 49:06
CC:MNB
RZP
11-9-99 AC
COS
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
copied
Enlore Report:
November 5, 1999
Baily
Podecta
Pg3
Reed
Burson
CHART OF THE WEEK
Pedesta
Fiscal Balances Generally Improving Outside of Japan
4
Japan
2
United States
Surplus (+) or Deficit (-) as Percent of GDP
0
-2
-4
-6
EU
-8
Canada
-10
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Data for 1999 and 2000 are projections
The government balance sheets of many industrialized countries improved
markedly over the last decade, except in Japan where they have gone from a
sizable surplus of about 3 percent of GDP to a deficit of about 9 percent of GDP.
Only part of the deterioration in Japan's budget position is related to its
macroeconomic performance: OECD estimates of Japan's structural deficits
(deficits adjusted for the state of the business cycle) show a similar trend.
CONTENTS
SPECIAL ANALYSES
U.S. Service Sector Poised to Gain from New WTO Round
1
Gun Industry Innovation and Gun Violence
3
ARTICLE
The "Liquidity Trap" and Monetary Policy
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
International Roundup
8
Releases
9
U.S. Economic Statistics
10
Financial and International Statistics
11
WOW! I'M RICH BEYOND MY
LOOK ! A QUARTER "
DREAMS. I CAN HAVE
MAYBE THERE'S
ANYTHING I WANT ALL
MORE
MY PRAYERS HAVE BEEN
ANSWERED.'
SPECIAL ANALYSIS
U.S. Service Sector Poised to Gain from New WTO Round
The CEA has prepared a report on America's interest in the WTO. The report
finds that the trading system has played a central part in opening foreign markets,
establishing an effective rule of law, and promoting economic development
internationally. A key finding is that services are becoming increasingly
important to the U.S. economy and that U.S. firms are highly competitive in
global markets and stand to gain from additional market access.
Background. The Uruguay Round, which concluded in 1994, brought trade in
services into the multilateral trading system by creating the General Agreement
on Trade in Services (GATS). The GATS covered all traded services (except
most air transport services) but did not open markets fully. Nevertheless, it
provided a framework for ongoing liberalization. Post-Uruguay Round
negotiations have yielded additional commitments in financial and basic
telecommunications services, opening up new opportunities in areas in which the
United States is competitive. Moreover, countries agreed to begin a new round of
negotiations on services no later than January 1 of next year.
Services account for a large and growing share of U.S. economic activity.
Services accounted for about 55 percent of U.S. GDP in 1998, up from 32 percent
in 1950. U.S. service exports have also grown dramatically, at a rate exceeding
that of merchandise exports. Service exports accounted for about 29 percent of
total exports last year, up from 17 percent in 1950.
U.S. services are highly competitive in
Growth in U.S. Private Service
the global market. In 1998, the United
Total
States accounted for over 18 percent of
all commercial service exports, ranking
first in the world. The top five
Financial
categories of U.S. private service
exports, ranked by export value, were:
Insurance
travel services; transportation services;
Business and
royalties and license fees; business,
technical
professional, and technical services; and
Royalties and
fees
financial services. Recent data on U.S.
Telecom-
exports suggest areas of potential gain
munications
from the GATS:
Education
1994-
1998
Between 1994 and 1998, total U.S.
Travel
0 1986-
exports of private services increased
1994
Transportation
from $186 billion to $246 billion, a 7
0
5
10
15
20
25
30
percent annual growth rate (see chart).
Percent per year
The top gainers were financial services
Weekly Economic Briefing
1
November 5, 1999
which increased about 24 percent per year: insurance services which grew
about 14 percent per year; and business, technical, and professional services
which grew about 12 percent per year. For the most part, these types of
service exports have experienced more rapid growth since 1994 than they did
during the period in which the Uruguay Round was negotiated.
In the post-Uruguay Round period, U.S. exports of travel and transportation
services grew less rapidly than they did in the earlier period. The slowing of
growth in U.S. exports of travel and transportation services reflects a number
of factors: most aviation services were not covered under GATS, these
markets are more mature, and the growth slowdown in many Asian and
European economies.
Services agreements provide first steps toward potential gains. As a leader in
the global services market, the United States is highly competitive in many areas
of services and stands to benefit from future negotiations to open markets.
Weekly Economic Briefing
2
November 5, 1999
SPECIAL ANALYSIS
Gun Industry Innovation and Gun Violence
crum
Faced with limited growth opportunities in the market for hunting and sporting
firearms over the past two decades or so, gun manufacturers have turned to the
development and marketing of increasingly lethal pistols. This development has
contributed to an increase in the economic and societal costs of gun violence.
copied
The changing market for firearms. Major (non-criminal) sources of demand
Reed
for firearms include military and police purchases, hunting and sport shooting,
and self-protection. Into the mid-1960s, rifles and shotguns accounted for more
Buison
than two-thirds of all civilian firearm purchases. While the total U.S. production
Podesta
of civilian firearms has fluctuated in the range of 3.3 to 7.8 million guns per year
since then, the mix of guns produced has changed along two dimensions:
More handguns. With the declining importance of demand for hunting and
sporting guns, in part because of increased levels of urbanization, rifles and
shotguns have declined, while handguns have increased as a share of all guns
available for sale. The number of hunting licenses issued by states dropped 11
percent between 1982 and 1997 and target-shooting participation has been flat
in recent years. Handguns represented more than 40 percent of guns available
for sale in every year between 1980 and 1997 and more than half of guns
available for sale in some years.
More pistols. Within the handgun category, pistols (which carry their extra
cartridges in a magazine usually located in the handle of the gun) became
more important than revolvers (whose rotating cylinder functions as both the
magazine and the chamber). Pistols typically hold more rounds than a
traditional six-shot revolver and can be fired more quickly.
Lethal innovation. With limited demand growth and a growing stock of existing
firearms (well-maintained guns are highly durable), the gun industry appears to
have viewed the development of pistols as an area where innovation and product
differentiation might boost sales. U.S. pistol production doubled in the late
1980s, and pistols represented 74 percent of handgun production in 1998. In
addition to increasing the production of pistols relative to revolvers,
manufacturers have increased the magazine capacity of pistols (allowing more
bullets to be fired between reloadings) and their caliber (allowing more deadly
bullets to be used). Finally, to cater to the self-protection market and with the
enactment of concealed-carry laws in some states, manufacturers have tried to
develop smaller but still powerful weapons that can more easily be concealed.
Although these innovations may have contributed to an increase in pistol sales for
a time, pistol production has recently fallen back to mid-1980s levels.
Social costs. The industry's innovations have had important consequences for the
social costs of gun violence. In addition to being a factor in increased rates of
Weekly Economic Briefing
3
November 5, 1999
11-9-99
unintentional death and suicide, handguns are the primary weapon used in
homicide. In 1998, over 80 percent of all firearm-related homicides involved a
handgun-while handguns represent only about a third of all guns in existence.
Firearm Homicide Deaths and Pistol Production
The increased prevalence of pistols
8
2.5
shows up in the crime statistics as well.
Homicide rate
In 1989-90, only 3 or 4 of the top 10
(left scale)
20
7
guns that were used in crimes and
Deaths per 100,000 people
traced by the Bureau of Alcohol,
1.5
6
Millions of pistols
Tobacco, and Firearms were pistols,
Pistols produced in
1.0
but this number rose to 7 to 9 in 1992-
the United States
95. Firearm homicide death ates rose
5
(nght scale)
0.5
into the early 1990s with the increased
production of pistols, but both have
4
00
1986
1988
1990
1992
1994
1996
since declined sharply (see chart). The
increasing prevalence of pistols may
also account for research findings such as the increase in the average number of
wounds per gunshot victim in the late 1980s and the increase in the caliber of
bullets recovered in autopsies into the early 1990s.
Conclusion. Limited demand for traditional hunting and sporting guns has led
gun producers to pursue product innovations that have raised the economic and
social costs of gun violence. The challenge for public policy is to create
incentives that would encourage the industry to pursue innovations that would
reduce the cost of gun violence, such as the development of child safety locks or
reliable "smart guns" that could only be fired by their owners.
Weekly Economic Briefing
4
November 5, 1999
ARTICLE
The "Liquidity Trap" and Monetary Policy
Monetary policy primarily affects the economy through the control of short-term
interest rates. But what if an economy were in a recession and interest rates were
already near zero? Monetary policy would be unable to push interest rates below
zero-and thereby stimulate the economy-because people can always hold
currency yielding a zero interest rate. Economists refer to this situation as a
"liquidity trap." A recent Federal Reserve conference explored the policy
implications of liquidity traps.
Liquidity traps in practice. The Great Depression in the United States provided
a clear example of a liquidity trap. In the early 1930s, the unemployment rate
exceeded 20 percent (see upper chart). The Fed brought Treasury bill rates to
U.S. Interest Rates, Unemployment,
nearly zero percent, but was then
and Inflation, 1929-41
unable to lower rates further. This
28
24
Unemployment rate
constraint likely increased the severity
20
16
and duration of the Depression.
12
Percent
8
T-bill yield
The Japanese recession of the 1990s
4
0
provides a more recent, albeit less
-4
CPI
dramatic, example of a liquidity trap.
-8
(annual percent change)
-12
The unemployment rate in Japan has
1929
1931
1933
1935
1937
1939
1941
more than doubled since 1993 and
consumer price inflation, which had
Japanese Interest Rates, Unemployment,
been running at about 3 percent per
and Inflation, 1990-99
year in the early 1990s, turned to
10
deflation (see lower chart). The Bank
8
Overnight call rate
of Japan reduced overnight rates to
6
Unemployment rate
below 1 percent 4 years ago and
Percent
4
reduced them again to below 0.1
2
percent earlier this year, but it has been
unable to cut rates further because of
0
CPI (12-month change)
the liquidity trap. This has likely
-2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
delayed Japan's recovery.
The potential for a liquidity trap in the United States. Research presented at
the conference suggests that the likelihood of an economy finding itself in a
liquidity trap depends in part on the average rate of inflation. Over the last 40
years, the inflation rate in the United States averaged about 4 percent and short-
term rates averaged about 6-1/2 percent, providing monetary policy with a sizable
cushion to lower rates in an economic downturn. In contrast, if the average
inflation rate were zero, short-term interest rates would likely average around 2-
1/2 percent, leaving the Fed with little room to reduce rates in a recession. Some
economists have therefore argued that the Federal Reserve should aim for an
average inflation rate a few percentage points above zero.
Weekly Economic Briefing
5
November 5, 1999
Implications. One way to avoid or lessen the impact of the liquidity trap is for
monetary policy to move quickly and decisively at the first signs of recession or
deflation in order to avoid a severe downturn. A firm commitment to continue
with a zero-interest-rate policy until the economy has fully recovered may also
help restore confidence and bring down long-term interest rates. However, if
interest rates are near zero, other policies may be needed. Some economists have
argued that a central bank could attempt to bid down the exchange value of its
currency through massive purchases of foreign exchange, thereby boosting net
exports. Another approach would be to use stimulative fiscal policies designed to
substitute for monetary policy when interest rates are near zero.
Weekly Economic Briefing
6
November 5, 1999
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Study Finds Benefits from High-Quality Childcare. Low-income children who
received high-quality child care at a young age scored better on tests into early
adulthood and were more likely to have attended college relative to those who did
not receive such care, according to a recent evaluation of the Abecedarian Project.
The 57 children from low-income families who received full-time high-quality
childcare from infancy to age 5 had higher average scores on cognitive tests at
ages 12, 15, and 21, were twice as likely to be in school at age 21, and were more
than twice as likely to have attended a 4-year college or university. The study
provides evidence that early childhood education can significantly improve
scholastic success and educational attainment of poor children well into early
adulthood.
Americans Lacking Adequate Life Insurance. A significant share of American
couples approaching retirement do not possess adequate life insurance, according
to a recent study. The study uses survey data from nearly 2,300 couples aged 51
to 61 in 1992. It finds that nearly one-third of wives and more than 10 percent of
husbands would have suffered reductions in living standards of 20 percent or
more had their spouses died in the year of the survey. A striking finding of the
study is that households most vulnerable to economic hardship resulting from the
death of a spouse do not adequately protect themselves against this risk.
Beige Book Reports Strong but Slowing Growth. Most districts continue to
report strong economic growth but some slowing is noted. Manufacturing activity
continues to advance in almost all districts and for most industries. Although four
districts report some slowing in consumer outlays, spending generally remains
strong and most retailers are expecting increases in holiday sales from last year.
Real estate and construction are still robust in most districts, though there are
signs of some moderation in activity. The mining and energy industries are
showing signs of recharging. In terms of agriculture, most of the country is
having a good harvest. Labor markets remain tight across the country, with
numerous districts reporting continued difficulty in finding and retaining qualified
workers. Many districts report a pickup in wage increases, but overall prices
remain stable with some notable exceptions: Increases in prices were noted for
some manufacturing inputs, health care, memory chips and construction materials.
By contrast, low prices continue to weigh heavily on some important segments of
the agricultural sector.
Weekly Economic Briefing
7
November 5, 1999
INTERNATIONAL ROUNDUP
New Polls on Global Corruption. A report released by Transparency
International, a global anti-corruption organization, indicates that of 99 countries
included in its survey, officials in Cameroon are perceived to be the most corrupt
and those in Denmark the least. The survey included business people, risk
analysts, and the general public. The United States ranked 18th best on the
"Corruption Perceptions Index," little changed from its rank in the past 2 years.
Although many major industrial countries do well at combating corruption at
home, companies based in these countries often pay bribes while doing business
abroad, according to a survey of respondents from 14 emerging markets. Among
19 leading exporting countries, companies from China were viewed as the most
likely to pay bribes in order to win business overseas, while those from Sweden
the least. The United States ranked in the middle of the "Bribe Payers Index".
EU Adopts Cuts in Agricultural Export Subsidies. Responding to financial
constraints in the Common Agricultural Policy (CAP) budget, the European
Commission has started to cut export subsides for certain agricultural products.
Last Thursday, the EU decided to cut certain milk product subsidies up to 7
percent and subsides for sugar used in certain products will be cut up to 4.5
percent. More cuts are expected with the total amount of cutbacks likely to be
around 200 million euros ($192 million), according to EU officials. However,
even with these cuts, the European Union remains one of the largest users of
export subsidies and the U.S. has stated that the elimination of export subsidies is
a priority in the next round of WTO negotiations.
Nissan Plans Radical Restructuring. The Japanese car company Nissan has
unveiled a radical corporate restructuring plan which is likely to include massive
job cuts and dramatically reduce its number of suppliers. Nissan has been losing
money in recent years and is currently operating at only 53 percent of capacity.
Earlier this year, Nissan formed an alliance with Renault and Nissan's new chief
operating officer is an executive from Renault. The goal of the restructuring plan
is to reduce costs by 1 trillion yen ($9.5 billion) by 2002 and return Nissan to
profitable growth. Many features of this plan are at odds with traditional Japanese
employment and management practices. The plan foresees the closure of five
plants and the elimination of 21,000 jobs, of which 16,500 are in Japan. Nissan
has stated that the reduction in employment will take place through a combination
of attrition, an increase in part-time employment, spin-off of non-core businesses,
and early retirement. In another change from traditional Japanese practices,
Nissan plans to establish a performance-based career advancement program in
Japan.
Weekly Economic Briefing
8
November 5, 1999
RELEASES THIS WEEK
Employment and Unemployment
**Embargoed until 8:30 a.m., Friday, November 5, 1999**
In October, the unemployment rate was 4.1 percent; it was 4.2
percent in September. Nonfarm payroll employment increased by
310,000.
Leading Indicators
The composite index of leading indicators fell 0.1 percent in
September, following no change in August.
NAPM Report on Business
The Purchasing Managers' Index fell 1.2 percentage points in
October to 56.6 percent. (A reading above 50 percent indicates
that the manufacturing economy is generally expanding.)
MAJOR RELEASES NEXT WEEK
Producer Prices (Wednesday)
Retail Sales (Friday)
Productivity (Friday)
Weekly Economic Briefing
9
November 5, 1999
U.S. ECONOMIC STATISTICS
1970-
1993
1998
1999:1
1999:2
1999:3
Percent growth (annual rate)
Real GDP (chain-type)
3.0
4.6
3.7
1.9
4.8
GDP chain-type price index
5.2
1.1
2.0
1.3
1.0
Nonfarm business (NFB) sector:
Productivity (chain-type)
1.5
2.6
3.6
0.6
N.A.
Real compensation per hour:
Using CPI
0.6
2.5
2.9
1.5
N.A.
Using NFB deflator
1.3
3.7
3.0
3.7
N.A.
Shares of Nominal GDP (percent)
Business fixed investment
11.4
12.5
12.6
12.6
12.8
Residential investment
4.5
4.2
4.4
4.5
4.4
Exports
8.2
11.0
10.7
10.7
10.9
Imports
9.2
12.7
12.9
13.4
13.9
Personal saving
6.6
2.6
2.2
1.8
1.5
Federal surplus
-2.8
0.5
1.1
1.3
N.A.
1970-
August
September
October
1993
1998
1999
1999
1999
Unemployment Rate (percent)
6.7**
4.5**
4.2
4.2
4.1
Payroll employment (thousands)
increase per month
129
41
310
increase since Jan. 1993
19794
Inflation (percent per period)
CPI
5.8
1.6
0.3
0.4
N.A.
PPI-Finished goods
5.0
0.0
0.5
1.1
N.A.
**Figures beginning 1994 are not comparable with earlier data.
New or revised data in boldface.
Employment and unemployment data embargoed until 8:30 a.m., Friday, November 5, 1999.
Weekly Economic Briefing
10
November 5, 1999
FINANCIAL STATISTICS
September
October
Nov. 4,
1997
1998
1999
1999
1999
Dow-Jones Industrial Average
7441
8626
10714
10397
10640
Interest Rates (percent per annum)
3-month T-bill
5.06
4.78
4.68
4.86
4.95
10-year T-bond
6.35
5.26
5.92
6.11
5.95
Mortgage rate, 30-year fixed
7.60
6.94
7.82
7.85
7.84
Prime rate
8.44
8.35
8.25
8.25
8.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
November 4, 1999
Week ago
Year ago
Euro (in U.S. dollars)
1.044
-0.8
N.A.
Yen (per U.S. dollar)
104.5
-0.6
-10.4
Major currencies index (Mar. 1973=100)
92.38
0.0
0.2
(trade-weighted value of the U.S. $)
Real GDP
Unemployment
CPI inflation
International Comparisons 1/
growth
rate
(percent change in index
(percent change last 4 quarters)
(percent)
last 12 months)
United States
4.1 (Q3)
4.1 (Oct)
2.6 (Sep)
Canada
3.7 (Q2)
7.8 (Aug)
2.5 (Sep)
Japan
1.1 (Q2)
4.7 (Aug)
-0.2 (Sep)
France
2.1 (Q2)
11.3 (Aug)
0.7 (Sep)
Germany
0.6 (Q2)
7.1 (Aug)2/
0.6 (Sep)
Italy
0.8 (Q2)
12.1 (Apr)
1.8 (Sep)
United Kingdom
1.8 (Q3)
6.0 (Jun)
1.1 (Sep)
U.S. unemployment data embargoed until 8:30 a.m., Friday, November 5, 1999.
1/ For unemployment data, rates approximating U.S. concepts as calculated by the U.S. Department of Labor, Bureau of Labor
Statistics.
2/ Rate for former West Germany. Using OECD standardized unemployment data, the unemployment rate for unified Germany for
August was 9.2 percent.
Weekly Economic Briefing
11
November 5, 1999